1. (C) SUMMARY: The Pakistan Air Force (PAF) has approached the U.S. with a request to use Foreign Military Financing (FMF) to help pay for Mid-Life Updates (MLU) on its existing fleet of F-16 fighter aircraft. This request would require the modification of the original Letter of Offer and Acceptance (LOA) that sanctioned the deal and notification to Congress of the change. The MLU case is but one of three major cases that constitute the bulk of the over $3 billion F-16 sale. Pakistan's request to use FMF for the MLU case is linked to a slumping economy that limits its capacity to pay for military programs. While we are concerned about rewarding economic mismanagement, the failure of the F-16 program would have serious long-term consequences for our bilateral relationship. We realize that asking Washington to approach Congress on this controversial issue presents many difficulties but Pakistan's financial duress, and the serious possibility of the collapse of this symbolically important deal merits reconsideration of earlier decisions to limit the use of FMF for the MLU case.

2. (C) Summary Continued: Post appreciates that Washington has placed a great deal of time and effort in trying to ensure the F-16 deal achieves its foreign policy objectives while remaining consistent with Congressional intent. We understand that reconsidering the U.S. approach to the use of FMF for the MLU will entail a great deal of work within the executive branch and intensive consultations with Congress but we are at a decision point with the F-16 case. Failure to acknowledge the changed circumstances in Pakistan, both economic and political, may place this landmark deal at risk. END SUMMARY.

PAKISTAN AIR FORCE SEEKS FMF FOR F-16 MLU CASE

3. (SBU) In September 2006 the U.S. and Pakistan reached agreement to provide U.S. manufactured F-16's to the Pakistan Air Force (PAF). The agreement served to stabilize the conventional military balance in South Asia, provide additional business for U.S. defense companies and most importantly, promised to yield foreign policy benefits for the U.S. by exorcising, at least partially, the bitter legacy of the Pressler Amendment. The F-16 sale was primarily built around three separate Foreign Military Sales cases that had a potential value of $5.1 billion. The 2005 Kashmir earthquake and subsequent financial constraints caused Pakistan to reduce the number of new planes purchased from 36 to 18 lowering the overall value of the deal to $3.1 billion.

4. (SBU) The three cases were built around the 18 new planes valued at $1.4 billion; associated F-16 munitions for approximately $641 million; and the Mid Life Update for Pakistan's existing F-16 fleet valued at $891 million. Additionally, the U.S. has agreed to provide Pakistan with F-16s designated as Excess Defense Articles (EDA); Pakistan accepted 12 Block 15 F-16 A/B EDA aircraft.

5. (SBU) The Letter of Offer and Acceptance for the Mid-Life Update case covers the sale of the upgrade kits for Pakistan's existing fleet of Block 15 F-16 A/B aircraft, the cost of training Pakistani technicians, and the purchase of specialized tooling to accomplish the installation. Pakistan will also the MLU kits to upgrade some of the EDA F-16's we are providing them. The MLU case was written and agreed upon by the USG and Pakistan as a "mixed funding" case, allowing Pakistan to use $108.395 million in FMF credits on the overall $891 million case. This price does not include the cost of MLU installation outside of Pakistan -- a decision that will likely push the total value of this FMF case to over $1 billion. Pakistan viewed this allowance to partially fund the case with FMF as an opening to amend it on an annual basis. The PAF leadership believes the U.S. understood Pakistan intended to use future FMF credits on the MLU case.

6. (C) Understanding how Pakistan views FMF as opposed to how it is administered by the U.S. is an important element of the issue at hand. Starting in 2005 and extending through 2009, Pakistan planned to divide its annual FMF appropriation among its services. It did this because it understood the Presidential pledge to provide $300 million per year to be guaranteed. However, FMF is an annual appropriation and must be provided by Congress each year. This assumption, arrived

ISLAMABAD 00001673 002 OF 004

at without endorsement by the U.S., has produced a culture of entitlement within the Pakistani military as it pertains to FMF.

7. (C) Conversely, as it does with nearly all FMF accounts, the U.S. government views the annual appropriation to Pakistan as a single account and does not earmark it for Pakistan's Army, Navy or Air Force. When an LOA is signed, the Defense Security Cooperation Agency (DSCA) will set aside the total amount of FMF called for in it, even though the payments will be drawn down over the life of the case. DSCA takes the "oldest money" first, regardless of how Pakistan has allocated that money to its services. We must tell the Pakistanis that their current approach to FMF, i.e., dividing the money amongst the services, must change to more fully account for our mutual interests if it is to endure at its current levels.

8. (C) Pakistan believes its intent to modify the MLU LOA on an annual basis was clear from the sale's inception, saying that its approach was driven by the way the FMF program is administered. This expectation was further reinforced by the fact that Pakistan was allowed to amend both their C-130 and TPS-77 radar cases to apply more FMF to each LOA. Each case started as a mixed funding case; the U.S. allowed Pakistan to amend the case in following years until each were 100 percent FMF financed ($75 million and $100 million respectively).

9. (SBU) With the above rationale guiding their thinking, the PAF asked the Office of the Defense Representative - Pakistan to modify the terms of the congressionally notified LOA to allow for the use of a higher amount of FMF credits for the MLU case. The December 2007 request asked that the PAF be allowed to apply $137.74 million in FMF against the MLU case. This was the amount allocated to them by Pakistan's Joint Staff Headquarters. This request precipitated an exchange of letters between U.S. and Pakistani officials with Pakistan ultimately making its March 15, 2008 FMS payment. However, this was not before the PAF's Air Chief Marshal (ACM) Tanvir warned that a failure to release FMF to support the MLU program would result in its coming to a "grinding halt." This most recent payment likely does not reflect the PAF's acquiescence to the U.S. decision but rather a belief that a favorable decision will be arrived at prior to June 15, 2008 -- the next payment date for the MLU case.

PAKISTAN'S POSITION: STRAPPED FOR CASH AND COUNTING ON FMF

10. (C) The PAF's request is linked to several issues, the most pressing of which is a struggling national economy. The new government faces slowing economic growth and rising fiscal deficits. Pakistan's Finance Minister announced April 9 that the GOP is running an $8.3 billion budget deficit for the current fiscal year which ends June 30. While food, fuel and power subsidies accounted for the majority of this deficit, military expenditures posted a $1.2 billion cost overrun.

11. (C) Over the past year, the U.S. has ended cash transfers for Economic Support Funds (turning cash into project assistance) and reduced cash transfers validated by Coalition Support Funds (through greater scrutiny of claims). Nonetheless, the changes in these once reliable cash infusions have added to the strain of the economic slowdown and limited the resources available to pay for military equipment and other basic expenditures.

12. (C) This cash crunch coincides with a dramatic increase in payments due for U.S. weapons systems. The largest of these is the F-16 case. Between June 15, 2008 and June 15, 2009 Pakistan is scheduled to pay over $711 million towards the new F-16 case and an additional $290 million for the Mid Life Update. In a recent meeting with Major General Helmly, the U.S. Defense Representative to Pakistan, and Richard Millies, the Deputy Director of the Defense Security Cooperation Agency, ACM Tanvir informed them that Pakistan would not be able to make its June 15 MLU payment if FMF were not made available by then. Given Pakistan's resource constraints we deem this warning to be serious. While we appreciate the difficulty of approaching Congress on this sensitive issue if we do not do this in time to influence the

ISLAMABAD 00001673 003 OF 004

June 15 payment the F-16 program may begin to unravel.

13. (C) The F-16 program is only one of many large defense procurements Pakistan has planned. These include sales by Chinese, Swedish and French companies, although it is believed that these programs are financed through soft loans and related preferential financial inducements whose bills do not come due for five years or more. Nonetheless as Pakistan's economy continues its downward spiral it will likely find itself facing a choice between big ticket defense items and social welfare programs -- the latter underpinned by political promises made during the recent election campaign. Post has briefed both PPP Chairman Zardari and Ambassador designate to the U.S. Haqqani on the budgetary implications of the huge out year procurements planned by the military.

14. (C) The Pakistani military continues to plan for major defense expenditures despite the country's growing economic crisis. Given the new government's financial constraints the military will almost certainly be asked to contribute to spending reductions. An unwillingness by the military to reduce its spending could generate conflicts with a civilian government that faces very difficult economic choices in the coming months. Regardless of how these challenges are resolved we want to ensure that U.S. programs do not serve as a spark for civil-military disagreement.

POTENTIAL USE OF FMF FOR F-16 PROGRAMS - CT SUPPORT

15. (C) Despite the current economic challenges Pakistan still feels the need to fully invest in its territorial defense. While Pakistan's F-16s certainly have a symbolic, and perhaps emotional, salience they are also directly tied to the existential threat Pakistan perceives from India. India maintains a substantial, and growing, conventional military advantage over Pakistan; Islamabad's nuclear and missile programs reflect its need to counterbalance this advantage. An enhanced F-16 program also has deterrence value by giving Pakistan time and space to employ a conventional, rather than nuclear, reaction in the event of a future conflict with India.

16. (C) The 2008 Foreign Operations and Appropriations Act (FOAA) allows for the immediate use of $250 million of the $300 million in 2008 FMF for counterterrorism or law enforcement activities. The release of the remaining $50 million in FMF is dependent upon a report certifying that Pakistan is making a concerted counterterrorism effort and is implementing democratic reforms.

17. (C) Efforts by Pakistan to employ its F-16s in a Close Air Support (CAS) role, or to conduct tactical precision strikes against fleeting Al Qaeda or Taliban targets, would help us to credibly make the case to Congress for their use in the War on Terror and allow for application of FMF to the MLU case. These skills serve as combat multipliers for both counterinsurgency and conventional operations but require Pakistan to pursue training in both ground and air controlled CAS techniques. An offer to provide training has been extended to the PAF and to Pakistan's Chief of the Army Staff, General Ashfaq Kayani, but has not yet been accepted. The PAF has been disinclined to use F-16's in a tactical air mode due to the risk of collateral damage in civilian areas and its primary role in territorial defense.

18. (C) It is important to note that the Pakistani Air Force has employed its block 15 version of the F-16 in the FATA. It has used this asset sparingly and to little effect but this is due to a lack of capability not will. The Pakistanis are more likely to employ their F-16's in a counterterrorism mode if provided the training to assist in minimizing civilian casualties and the associated political fallout of imprecise air strikes. Linking use of FMF for the MLU to explicit commitments by the PAF to accept CAS training will enable us to make a credible case to Congress that the F-16 is being employed for counterterrorism purposes. Given this, the U.S. must remain closely engaged with Kayani on this issue if we are to change the way in which Pakistan's F-16s are used in the War on Terror.

COMMENT

ISLAMABAD 00001673 004 OF 004

19. (C) Comment: For the Pakistani military, the F-16 sale is tangible proof of the post-9/11 bilateral relationship, and we seriously doubt they will allow it to fail. That said, the cash-strapped new government as a whole, and the military in particular, face some critical decisions about how to pay for this program, and how support for F-16s will impact their other military procurement choices. They may, for example, choose to maintain F-16s at the cost of programs that better meet USG counter-terrorism goals.

20. (C) Comment Continued: The USG has multiple reasons to continue supporting the F-16 program. It demonstrates our respect for Pakistan's territorial defense needs as we push them to do more against a militant insurgency; it provides continued benefits for use of Pakistan's territory for transit of goods in support of U.S/ISAF Afghanistan operations; and it supports our regional non-proliferation goals by giving Pakistan conventional capability to delay nuclear weapons use in the event of a conflict with India. While we respect Washington concern about re-opening the use of FMF for the F-16 MLU program with Congress, we believe the overall benefits merit a serious second look at the issue. End Comment.